May 1, 2014
Investment Newsletter for the end of April, 2014
There is some confusion as to what the market is and what an index is. The terms are usually used incorrectly.
The market is all the investments that is possible to buy. It includes many tens of thousands of different stocks. It includes both US and international (all countries). It includes small companies and big companies. It also includes real estate investments, bond investments, options, and etc. You get the idea. It is huge and it is impossible to put a number on how it is doing. There are too many pieces and different ways of calculating gain.
The short cut that is used is to take a sample of the market. The Dow is the ending price of thirty very big US companies. Thirty companies is not the market. The Dow is an index. The S&P 500 is the ending price of 500 big US companies. It is not the whole market. It also an index. There are hundreds of indexes in use, depending on what you are trying to measure. I pay a lot of attention to the Russell 2000 value index. This index represents 2000 small stocks that have a value (rather than growth) orientation. It is also not the whole market.
I bring these terms up because of the results this month. Yesterday, the Dow closed at an all-time high of $16,580.84. The month was up $123.18. The headlines said the market hit an all-time high. Not true, the index hit an all-time high. The S&P index went up from $1,872.34 to 1,883.85. The Russell 2000 value index, however, was down from $1,173.04 to $1,118.79. So what did the market really do? It is an unknown. What index do you use? Many sections of the market do not indexes. As an example, can you tell me exactly to the dollar what all real estate went up this month?
Because I weight portfolios towards small cap value, the Russell 2000 value index is a fair sample of your version of the market. This index was down this month. Most of your portfolios were also slightly down accordingly.
Small cap value historically outperforms large cap (little companies have bigger investment returns than big companies do). The Russell 2000 value index will outperform the S&P 500 index. It will outperform over long periods of time. It did not do so this month. In the last 12 months, the S&P was up 17.9%. The Russell up 18.1%. Over ten years, Russell up 99.9%. S&P up 70.1%.
This year has brought my investment practice substantial growth. I have both new clients who started accounts with me and old clients who increased their investment. I am deeply humbled and appreciative of this trust. It seems this newsletter was a factor for many existing clients. It seems all of you read them. I intend to organize/re-edit my newsletters of the last two years or so. It is my agenda to create a small book; explaining investment concepts, my philosophies as to market behavior, and so on. I have no idea yet what to call it.
Thank-you, all of you.